Key takeouts

  • Following the commencement of civil proceedings against Westpac by AUSTRAC, APRA has said it is investigating whether Westpac's conduct (and/or the conduct of its directors/senior managers) may have breached the lender's obligations under the Banking Act (including BEAR obligations) and/or APRA's prudential standards.  
  • APRA has also imposed an additional capital requirement ($500m) on the lender 'to reflect the heightened operational risk profile of the bank'.
  • APRA Deputy Chair Mr John Lonsdale said that Westpac 'is financially sound' though 'there are potentially substantial gaps in risk governance that need to be closed'.  
  • APRA has said that the investigation is likely to be extensive and 'lengthy', given the nature of the matters raised by AUSTRAC, the number of alleged breaches and the period of time over which they occurred
  • Mr Lonsdale observed that the investigation is an opportunity for the regulator to exercise legal powers that were expanded and strengthened following the CBA Prudential Inquiry, including enhanced investigative powers and the implementation of the BEAR.  
  • APRA has also said that it will work with AUSTRAC and ASIC as appropriate (given the legal proceedings, and investigation also on foot)
  • In a short statement, acknowledging APRA's announcement, Westpac said it is 'committed to cooperating' with the regulator in 'all aspects of its investigation and review'.  

APRA investigation

Following the announcement by The Australian Transaction Reports and Analysis Centre (AUSTRAC) that it has commenced civil proceedings against Westpac for alleged contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (see: Governance News 27/11/2019), the Australian Prudential Regulation Authority (APRA) has said that it has 'formally commenced' an investigation.

APRA says that the investigation will focus on whether conduct by Westpac, its directors/senior managers, that led to the matters alleged by AUSTRAC, as well as the bank’s actions to rectify and remediate the issues after they were identified, contravened the Banking Act 1959 (including the banking executive accountability regime (BEAR)) or APRA's prudential standards.

Details: Scope of APRA's investigation

APRA says that in 'considering possible contraventions of the Act and the prudential standards' APRA's investigation will examine:

  • the adequacy and extent to which governance, control and risk frameworks, were appropriately implemented
  • whether accountability and remuneration arrangements were 'adequate, and appropriately implemented to effectively manage non-financial risks'
  • whether there was a failure to comply with accountability obligations under the BEAR
  • whether there was a failure to comply with the requirements of the prudential standards including Prudential Standard CPS 510: Governance, Prudential Standard CPS 520: Fit and Proper, and Prudential Standard CPS 220: Risk Management
  • whether there was a failure to 'promptly notify APRA of any significant breaches and/or a breach of accountability obligations'.

Announcing APRA's investigation, APRA Deputy Chair Mr John Lonsdale said that 'AUSTRAC’s statement of claim in relation to Westpac contains serious allegations that question the prudential standing of Australia’s second largest bank. While Westpac is financially sound, there are potentially substantial gaps in risk governance that need to be closed. Given the nature of the matters raised by AUSTRAC, the number of alleged breaches and the period of time over which they occurred, this will necessarily be an extensive and potentially lengthy investigation.'

Mr Lonsdale added that the investigation is an opportunity for the regulator to exercise legal powers that were expanded and strengthened following the CBA Prudential Inquiry, including enhanced investigative powers and the implementation of the BEAR.

Additional capital requirements and review of Westpac's risk governance

APRA says it will also:

  • Increase Westpac’s capital requirements by $500 million, 'to reflect the heightened operational risk profile of the bank'. APRA says that this brings the total operational risk capital add-ons that Westpac is required to hold to $1 billion.
  • Launch an 'extensive review program focused on Westpac’s risk governance'. APRA says that the review will examine 'risk management, accountability, remuneration and culture' and an 'examination of the steps Westpac has been taking to strengthen risk governance in recent years, including through its self-assessment'.

Cooperation with other investigations

Noting the investigation by the Australian Securities and Investments Commission (ASIC), as well as AUSTRAC’s legal proceedings are also on foot, APRA said that it will cooperate with each agency cooperating where appropriate. [Source: APRA media release 17/12/2019]

Westpac response

In a short statement acknowledging APRA's announcement, Westpac said it is 'committed to cooperating' with the regulator in 'all aspects of its investigation and review'.

Westpac Group’s Chair, Lindsay Maxsted said, 'Westpac accepts the gravity of the issues presented by AUSTRAC. As previously stated, these shortcomings are unacceptable and we are determined to urgently fix these issues and lift our standards'. Mr Maxsted added that the lender will fully support APRA in its investigation and review and reiterated that an Accountability and Financial Crime Program Review (conducted by Promontory) is underway.

Commenting on the additional capital requirement, Mr Maxsted said that it will be implemented through an increase in risk-weighted assets, and will apply from 31 December 2019. He added that the 'change is expected to reduce Westpac’s Level 2, common equity tier 1 (CET1) capital ratio by approximately 16 basis points, based on the Group’s balance sheet as at 30 September 2019'.